India's world-beating growth not enough to end deep jobs drought

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The world’s fastest growing major economy isn’t growing nearly fast enough. That may seem like an absurd description for India, an economy the International Monetary Fund expects to expand 7.3 per cent in the fiscal year through March 2019 and 7.5 per cent in the next. Yet the reality is that even at its current pace, India is having trouble creating enough new jobs for its massive workforce or enough wealth to broaden its middle class.

With its demographic tailwind and massive developmental needs, Asia’s third-biggest economy should be growing at double-digit rates. Holding India back are glacial economic reforms, a fragile banking sector, rigid labour laws and a spotty educational system that imparts limited skills to the 12 million who enter the job market each year.

Prime Minister Narendra Modi is trying to address these challenges. Yet analysts agree that more needs to be done to open up the economy, attract foreign capital and generate the kind of wealth and business opportunities that has broadened the middle class in China, whose $12.2 trillion economy is more than four times as big as India’s ($2.6 trillion).

Underachiever

“It hasn’t embraced global trade and foreign direct investments in the way China aggressively succeeded,” said Jim O’Neill, a former Goldman Sachs asset management chair and ex-commercial secretary to the UK Treasury.

“India has created big wealth for a limited number of people at the highest income levels, but hasn’t created hundred of millions of middle income class,” he said.

The latest pulse check for India’s economy came Friday. Gross domestic product expanded 8.2 per cent in the three months through June from a year earlier. That was the fastest pace in nine quarters.

Reforms and fiscal prudence are serving the economy well and this growth in an environment of global turmoil represents the potential of India, Finance Minister Arun Jaitley said via Twitter posts.

Ahead of the data, India’s rupee dropped below 71 to a US dollar, a new low that could possibly deter foreign investors, fan imported inflation and prompt intervention from the central bank — all having implications on growth in coming months.

Jobs challenge

With more than 90 per cent of India’s labour force employed in the nation’s informal economy, the government has struggled to produce reliable jobs data to even get an accurate read on the level of joblessness in India. A glimpse into just how dire the job market is came in March, when the government announced 90,000 vacancies at the state-run Indian Railways, the nation’s biggest civilian employer, and a staggering 28 million people applied.

India should be enjoying a demographically powered economic dividend at this stage of its development. It’s one of the youngest countries in the world with a median age of 28, compared to China’s 37 and 47 in Japan.

Yet economic gains from favourable demographics aren’t automatic. A lot depends on whether the government can harness that dividend and overcome the population’s skill shortage. And time is ticking — in 2040 the share of the population that’s of working-age is set to start declining.

The jobs void risks tarnishing the country’s image as an investment destination, stoking social unrest and posing a threat to Prime Minister Modi’s re-election bid early next year. That explains why employment creation is a top priority for Modi after he made a campaign promise to create 10 million jobs each year.

In his defence, Modi has said there are enough jobs and the data doesn’t properly reflect the job creation during his tenure. However, there is also evidence that Modi’s policies have created economic setbacks.

Data provided by private research firm, the Centre for Monitoring Indian Economy Pvt, show 1.5 million jobs were lost immediately after a ban on large-denominated money notes was imposed in late 2016. And last July’s chaotic introduction of a consumption tax adversely affected labor-intensive sectors like farming and construction.

Those twin blows dragged India’s growth to a sub-par 6.6 per cent in the financial year ended March 2018.

Eswar Prasad, a professor at Cornell University and an ex-IMF official, says a sustained growth of 7-7.5 percent will lead to a healthy increase in per-capita income over time.